A Relatively Low Risk Naked Put Strategy For Citigroup

Selling naked puts is a great way to purchase shares in companies you like at a predetermined price. In essence, you are getting paid to wait.

Benefits associated with selling naked puts

In essence, you get paid for entering a "limit order" for a stock or stocks you would not mind owning.

It allows one to generate income in a neutral or rising market.

When you sell a naked put you are in a way acting like an insurance agent. The seller of the option agrees to buy the stock in the future if it drops to a certain level before the option expires. For this, you (the seller) are paid a premium upfront. If this strategy is repeated over and over again these premiums can really help boost your returns over time.

Acquiring stocks via short puts is a widely used strategy by many retail traders and is considered to be one of the most conservative option strategies. This strategy is very similar to the covered call strategy.

The safest option is to make sure the put is "cash secured." This simply means that you have enough cash in the account to purchase that specific stock if it trades below the strike price. Your final price would be a tad bit lower when you add the premium you were paid up front into the equation. For example, if you sold a put at a strike of 20 with two months of time left on it for $2.50, $250 per contract would be deposited in your account.

Time is on your side. Every day you profit via time decay as long as the stock price does not drop significantly. In the event it does drop below the strike you sold the put at, you get to buy a stock you like at the price you wanted. Time decay is the greatest in the front month.

The stock has performed badly since 2009; one would have lost money if one had purchased shares in Citigroup in 2009. Basically this stock is a dog but even dogs have their day in the sun.

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Citigroup has fairly strong support in the 24.00-25.00 ranges as can be seen by looking at the chart above. We would wait for it to test the 24.50-25.00 ranges and then sell naked puts in the 23.00-24.00 ranges.

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Citigroup closed at 26.92, so we can roughly assume that the Nov 23 puts will be trading roughly at the same price the Nov 25 puts are trading now if it drops down to the 24.50-25.00 ranges. The last trade on the Nov 25 put was at $2.74. For this example, we will assume that we are able to sell the Nov 23 puts for $2.70 when it drops down to 25.00. For each contract, you will receive $270. If the stock trades below 23, you will be assigned the shares, and your final price will be 20.30 (23-2.70). If the stock does not trade below 23 you get to keep the premium.

One strategy where you can eliminate almost all the risk is to place a stop at 20.30, your break even price. If the stop is hit you are out but suffer no loss (other than commissions), and you can start the whole process again.

The markets are oversold on a short-term basis, and so they could experience some sort of relief rally. Long-term investors can use strong pullbacks to slowly start deploying money into long-term investments. Investors looking for other investment ideas might find this article to be of interest; Is It Worth Getting Into General Electric?

Disclaimer

This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies - let the buyer beware.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: EPS and Price Vs industry charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Consensus estimate analysis table sourced from reuters.com. Option table sourced from yahoo finance.